Takeover talk surrounds Supervalu, Best Buy

  • Article by: MIKE HUGHLETT and THOMAS LEE , Star Tribune staff writers
  • Updated: June 13, 2012 - 9:26 PM

Shares of Supervalu and Best Buy have fallen so much that some observers think takeovers are possible.

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A Supervalu truck in the Supervalu distribution center in Hopkins.

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The share prices of two of Minnesota's marquee companies have fallen so far that speculation is emerging about leveraged buyouts.

Barclays stock analyst Meredith Adler wrote in a report this week that supermarket operator Supervalu Inc. has become a particularly cheap LBO target, though any buyer would face significant hurdles. The company's stock trades at lows not seen since the early 1980s.

Takeover rumors have also surrounded Best Buy Co. Inc. Like Supervalu, the Richfield-based consumer electronics giant has been struggling to grow sales. With its stock now trading at just four or five times earnings, some analysts believe Best Buy could be an attractive takeover target.

"Best Buy appears to be attractive from a [leveraged buyout] perspective," Kellie Geressy-Nilsen, a senior director of Fitch Ratings, wrote in a report Wednesday.

"Best Buy still generates meaningful profitability, and its free cash flow remains strong. Potential buyers could also consider major cost cutting and accelerating the downsizing of the company's retail foot print versus current management plans."

The complexity of either company would make a buyout challenging, but the chatter reflects the low price tags that Wall Street currently places on the firms.

Supervalu's stock fell as low as $4.05 earlier this week, though it has since rallied and closed Wednesday at $4.27, up 9 cents, or just over 2 percent. Its 52-week high is $9.71, and it was trading around $16 in May 2009 when the Eden Prairie-based company announced Craig Herkert would be its new chief executive.

The stocks of the three biggest U.S. supermarket chains outside of Wal-Mart -- Kroger, Safeway and Supervalu -- are all cheap right now compared with their historical valuations, but Supervalu stands out as a leveraged buyout play, Adler wrote.

Supervalu's "low valuation and small market capitalization make it the most interesting candidate, in our view, and if a transaction could be financed, our analysis shows a return of 40 percent-plus to the buyer even if a premium of 50 percent is paid to shareholders."

But financing for any leveraged buyout -- which would rely heavily on debt -- is an issue, Adler wrote. Supervalu is already saddled with debt from its $12 billion buyout of Albertsons in 2006, and about $2.2 billion of Supervalu's debt comes due starting in 2015.

Supervalu declined to comment on the Barclays report.

Herkert is in the midst of a multiyear turnaround plan that has successfully cut costs but has yet to reap the sales gains Supervalu desperately needs. While profitable, Supervalu's same-store sales have fallen for 16 straight quarters and the company has steadily ceded market share to lower-price competitors.

"The stock market has been frustrated not only by the lack of visible improvement in [Supervalu's] results, but also with the company's actions," Adler wrote. "Many investors believe that Supervalu should move faster to reduce its prices," Adler wrote.

That's tricky, however, given that cutting prices too quickly without a sustained increase in customer traffic could hurt Supervalu's revenue even more.

Ajay Jain, a stock analyst at Cantor Fitzgerald, wrote in a recent report that "bearish sentiment and unusually high levels of short interest" in Supervalu's stock were due partly to a growing misperception that "bankruptcy is a real possibility."

But Supervalu's credit profile would have to deteriorate to the point where the firm couldn't properly service its debt, he wrote. "Furthermore, the risk of bankruptcy isn't even remotely priced into [Supervalu's] bonds at this time."

Adler also wrote that despite its sales woes and debt burden, Supervalu has "healthy" current liquidity.

At Best Buy, founder Richard Schulze resigned from the board of directors last week to "explore all available" options for his 20 percent stake in Best Buy. One of those options is to take the company private under new management, according to two sources with knowledge of the situation.

Schulze has already hired a prominent New York lawyer and Credit Suisse, an investment bank known for leveraged buyouts, the sources say.

But analysts say a private takeover is still a long shot. Schulze would need to offer at least $9 billion for shareholders to bite. Plus Best Buy faces strong challenges from Wal-Mart and online competitors such as Amazon, which has eroded Best Buy's market share and profitability.

"We note consumer electronics retailers are seeing significant secular threats, leading to questions as to the viability of their business models," Geressy-Nilsen wrote. "Retail LBOs are typically unsuccessful unless a retailer has a strong positioning within its category and the ability to grow market share on an ongoing basis in a sector that is characterized by minimal growth and heavy competition."

Mike Hughlett • 612-673-7003 Thomas Lee • 612-673-4113

  • SUPERVALU

    $36.1

    BILLION

    Annual sales

    $906

    MILLION

    Market

    valuation

    BEST BUY

    $50.7

    BILLION

    Annual sales

    $6.8

    BILLION

    Market

    valuation

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